Volatility Subsides in Lending Markets

LOS ANGELES—The lending markets gained strength and stability in the second quarter after a volatile early 2016, according to a new report from CBRE focusing on the lending markets. The Lending Momentum Index hit 186 points with the average loan constant up to 6%, while multifamily lending specifically climbed to 72.4%. Investment sales volume, however, declined to $105 billion nationally—although Los Angeles investment sales volume was up for the quarter—and commercial LTV was down to 59.5%. With the pull back at the beginning of the year and sluggish investment sales volume now, the lending markets have become difficult to read. We sat down with Val Achtemeier, EVP at CBRE, for an exclusive interview to find out more.

GlobeSt.com: Why has lending gained momentum in 2Q after a pretty rough 1Q? What is behind the shift?

Val Achtemeier: There has been strong momentum in the debt market in the second and third quarter of 2016, which is expected to continue through year-end. The debt markets got off to a volatile and choppy start in 2016 with a lot of dislocation in the CMBS market as well as the bond markets. In recent months we have seen both balance sheet and CMBS lenders be more assertive to win deals with index rates and all-in rates being attractive again. Lenders are still selective, but we continue to see well-priced debt options across the capital stack. Lenders are becoming more comfortable with the returns they are achieving on quotes, and domestic real estate feels like safe haven. Generally speaking, the fundamentals are very strong today in most markets for almost all property types.

GlobeSt.com: Why is lending momentum picking up while investment sales volumes are falling? What does this dynamic say about the market?

Achtemeier: Even though overall sale volumes are down, owners are always assessing strategic options for their capitalization plans. Financing is attractive today generally across the board with low-interest rates and more optionality of loan term, some pre-payment flexibility and other features, so many investors feel like 2016 is a good time to go to the debt markets to transact.

GlobeSt.com: One reason that there is some slowing is that some lenders have already hit their allocations for the year. In 2Q, which lenders were the most active and why?

Achtemeier: While some life company lenders are at or near their 2016 allocations, most of them still have plenty of dry powder for the right deals. We continue to see very solid quotes across the board from life companies, banks and CMBS lenders, plus debt funds are very active.  It is actually a competitive time in the market right now.

GlobeSt.com: What product types are the most sought-after among lenders, and is the lending momentum picking up in only certain sectors of CRE? 

Achtemeier: Industrial assets are in demand for many lenders, particularly industrial portfolio loans that offer scale and diversification. We also continue to see central business district office and creative office product in demand with lenders along with multifamily loans.‎ We have seen the momentum being strong throughout most of the product types.

GlobeSt.com: Do you expect this momentum to hold through the remainder of the year, or will we see more volatility in the final two quarters?

‎Achtemeier: The financing momentum is really strong right now, and I believe we will all have a busy and productive year-end in 2016. There are some regulatory hurdles that come in to play at year-end 2016, and I think both lenders and borrowers view this as a good window to firm up debt transactions given the current rates and options available in the market.

GlobeSt.com: What about next year? What is your 2017 forecast?

Achtemeier: We are optimistic about both the depth of the debt markets and pricing for 2017 and expect to see strong liquidity as a continued theme. The debt markets are in good shape and priced well.  ‎One of the beauties of the today's debt market is that there are products and lenders to fit most every need, which creates solid options and healthy competition. We are expecting continued constraints in the construction lending side of the business in 2017 as the regulatory environment for banks will continue to create some challenges in that arena, although debt funds will fill some of the void.

LOS ANGELES—The lending markets gained strength and stability in the second quarter after a volatile early 2016, according to a new report from CBRE focusing on the lending markets. The Lending Momentum Index hit 186 points with the average loan constant up to 6%, while multifamily lending specifically climbed to 72.4%. Investment sales volume, however, declined to $105 billion nationally—although Los Angeles investment sales volume was up for the quarter—and commercial LTV was down to 59.5%. With the pull back at the beginning of the year and sluggish investment sales volume now, the lending markets have become difficult to read. We sat down with Val Achtemeier, EVP at CBRE, for an exclusive interview to find out more.

GlobeSt.com: Why has lending gained momentum in 2Q after a pretty rough 1Q? What is behind the shift?

Val Achtemeier: There has been strong momentum in the debt market in the second and third quarter of 2016, which is expected to continue through year-end. The debt markets got off to a volatile and choppy start in 2016 with a lot of dislocation in the CMBS market as well as the bond markets. In recent months we have seen both balance sheet and CMBS lenders be more assertive to win deals with index rates and all-in rates being attractive again. Lenders are still selective, but we continue to see well-priced debt options across the capital stack. Lenders are becoming more comfortable with the returns they are achieving on quotes, and domestic real estate feels like safe haven. Generally speaking, the fundamentals are very strong today in most markets for almost all property types.

GlobeSt.com: Why is lending momentum picking up while investment sales volumes are falling? What does this dynamic say about the market?

Achtemeier: Even though overall sale volumes are down, owners are always assessing strategic options for their capitalization plans. Financing is attractive today generally across the board with low-interest rates and more optionality of loan term, some pre-payment flexibility and other features, so many investors feel like 2016 is a good time to go to the debt markets to transact.

GlobeSt.com: One reason that there is some slowing is that some lenders have already hit their allocations for the year. In 2Q, which lenders were the most active and why?

Achtemeier: While some life company lenders are at or near their 2016 allocations, most of them still have plenty of dry powder for the right deals. We continue to see very solid quotes across the board from life companies, banks and CMBS lenders, plus debt funds are very active.  It is actually a competitive time in the market right now.

GlobeSt.com: What product types are the most sought-after among lenders, and is the lending momentum picking up in only certain sectors of CRE? 

Achtemeier: Industrial assets are in demand for many lenders, particularly industrial portfolio loans that offer scale and diversification. We also continue to see central business district office and creative office product in demand with lenders along with multifamily loans.‎ We have seen the momentum being strong throughout most of the product types.

GlobeSt.com: Do you expect this momentum to hold through the remainder of the year, or will we see more volatility in the final two quarters?

‎Achtemeier: The financing momentum is really strong right now, and I believe we will all have a busy and productive year-end in 2016. There are some regulatory hurdles that come in to play at year-end 2016, and I think both lenders and borrowers view this as a good window to firm up debt transactions given the current rates and options available in the market.

GlobeSt.com: What about next year? What is your 2017 forecast?

Achtemeier: We are optimistic about both the depth of the debt markets and pricing for 2017 and expect to see strong liquidity as a continued theme. The debt markets are in good shape and priced well.  ‎One of the beauties of the today's debt market is that there are products and lenders to fit most every need, which creates solid options and healthy competition. We are expecting continued constraints in the construction lending side of the business in 2017 as the regulatory environment for banks will continue to create some challenges in that arena, although debt funds will fill some of the void.